Brexit and the Pound in Your Pocket

The early returns on Brexit are in, and the data are not good, regardless of claims to the contrary by supporters of the UK’s decision in June to withdraw from the EU. And, though sterling's depreciation should boost exports, history is not on Britain's side.

BERKELEY – The early returns on Brexit are in, and, contrary to what some have been claiming, they’re not good. In July, following the referendum, consumer confidence collapsed at its most rapid rate since 1990. Surveys of manufacturing and construction dropped precipitously. While August’s data were better, it is too soon to say whether the improvement was just a “dead cat bounce.”

In this topsy-turvy post-referendum world, the one piece of good news is sterling’s fall on the foreign exchange market. A lower exchange rate will make British exports more competitive. Faced with higher import prices, consumers will shift their spending toward domestic goods. This, too, will give a boost to the British economy.

The question is how big a boost. Skeptics caution that Britain relies heavily on exports of financial services, which are not especially price-sensitive, and that the scope for growth of merchandise exports is limited by the subdued global demand.

These are a list of the top 10 British exports, and I hardly believe that any of them are sold because the UK can make them cheaper than other countries. They are specialized products sold because of their particular functional abilities. British autos are not sold because they are cheaper or better than German autos. Oil is a market that is based upon supply and demand. The think the emphasis upon the slight changes in exchange rates is over emphasized.
1. Machines, engines, pumps: US$63.9 billion (13.9% of total exports)
2. Gems, precious metals: $53 billion (11.5%)
3. Vehicles: $50.7 billion (11%)
4. Pharmaceuticals: $36 billion (7.8%)
5. Oil: $33.2 billion (7.2%)
6. Electronic equipment: $29 billion (6.3%)
7. Aircraft, spacecraft: $18.9 billion (4.1%)
8. Medical, technical equipment: $18.4 billion (4%)
9. Organic chemicals: $14 billion (3%)
10. Plastics: $11.8 billion (2.6%)

Sterling was overvalued previously. Brexit may have precipitated a revaluation but it is not ‘the’ cause. There a numerous indicators that Sterling needed a realignment, the biggest of which is the 7.5% current account deficit, the largest variable element of which is not traditional trade but relative investment returns and these had become very unbalanced (largely due to the UK’s meagre economic performance still managing to outperform much of the rest of the West).

Lower Sterling was needed anyway and the sooner it has come the sooner we can sort out some the imbalances….. now how to get interest rates normalised…

Brexit will force Britain to work harder at improving skills and buying British and reducing the import deficit. The EU as confirmed by the IMF has been declining for a number of years as a proportion of world trade and every new "member state" joining the EU has nose dived the numbers further.

The decision of the UK to leave the EU was one born out of sheer frustration at the incompetence and failure of the EU elites in Brussels to deliver on any of the promises made in recent decades. Added to that we have had to tolerate unelected officials in Brussels, puffed up with self importance barking orders from on high and treating democracy as an optional extra, one they would prefer to ignore and sideline.

Britain voted Brexit because it didn't want to live in a post democratic age, where bullying and strong arm tactics was the way Germany with France as its lapdog would dominate and exploit the EU for its own personal gain.

The UK is a major destination for EU exports, the UK finding great trouble penetrating this market on its doorstep.

As with many things in history, the British have made a stand against authoritarianism and totalitarianism and we fear the weak and manipulated peoples of the EU have their mouths and hands bound with the prospect of changing the EU not even on the table.

I personally believe the British people took a brave decision to refuse to become part of a totalitarian group of countries "whipped" into decisions through majority voting and the personal ambitions of Germany and France.

Sometimes Barry, there are more important things than just economics. Britain will succeed in this new scenario, of course there will be shocks and tumbles, but in the end the UK does an awful lot of things right and in a world where most countries do a lot of things wrong, the British safe haven will attract those wanting to protect their funds and real estate investments in a country valuing the rule of law and democracy.

Sometimes you have to break eggs to make an omlette and the British have shown their mettle that they have the guts to stand up to those who would destroy them and the EU is no friend to the UK and hasn't been for a very long time. Our bank account was all they were interested in, fairness, democracy and competence are not part of the EU psyche - the EU is simply a club for GErmany and France not an organisation of equals.

Most regrettably, politicians, financial advisers, to include some economists, have no idea as to the true costs of the U.K. doing it alone. The central banks have made a bad situation worst, the cost of borrowing have sky rocketed since most lenders had to factor in potential risks of the so-called Brexit and of course the pressure on their profit margins due to negative or near zero interest rates. The citizens, small businesses, ordinary tax payers are having to pay the price, yet again, for all these failed policies, and the 1% / or large corporations have escaped it unharmed because they passed on the risks and high costs to the consumers / tax payers, as they always do. Utter incompetent leadership across the board.

The author rightly alludes to historical precedence, in warning that Brexit is Gamechanger.
Greatness that Britain achieved is often misunderstood - and if you don't know WHY, the answers to WHAT n HOW will be elusive.
By the end of 19th century, Britain's GDP alone equalled that of Europe's Five Next - as Paul Kennedy documents in his Magnus opus.
European entanglements have only resulted in tears - Britain's Greatness always created despite European challengers.
The Anglosphere was a result of Britain's pursuit of a World beyond Europe - given its instinctive disdain for European quagmire.
The Two World Wars only revalidated what Britain always knew - that Victory was guaranteed by The Anglosphere.
While the effort with Europe is always the right thing to do, the devil is in the details of the engagement.
In the predicament following Brexit, history indeed can be a guide in choosing the best option.
The World Economic Growth is not waiting for Europe to create chemistry that delivers.
The Pacific has already overtaken The Atlantic - with America Australia and Canada as crucial players inside.
The Anglosphere always the fulcrum - The Atlantic or The Pacific.
For Britain, Brexit has shown the path to the future - now it is up to Europe to decide it's course.
The Majority within Europe cannot hold The Minority to ransom forever.
Goal congruence cannot be achieved by marginalization of The Minority.
Because The Minority can depart to create The Majority in A New World.

@ Christine, appreciate the inputs you make.
Notwithstanding my comments, I voted Remain convinced that is the Right Path nevertheless.
In the hope that Reform is possible for the greater good - by Leave, we have precluded hope.
But the endless absence of Light - Democracy may have saved Britain yet again.
Who knows.

Great analysis and I confirm this. The EU is a protectionist inward looking construct, designed to allow Germany (predominantly) to dominate on its own doorstep with France lapping up huge subsidies to keep an inefficient agricultural sector from developing.

Britain gave the "club" and the fools at the EU 40 years to start delivering, all that has happened is that they have delivered for themselves.

The interference; micromanaging; ordering and diktats from unelected officials in Brussels became a farce that had to come to an end.

The UK will prove (with or without a deal) that you do not have to succeed to be part of the dying market of Europe and hopefully others will see that the EU should never have sought to become a United States of Europe, but simply a vibrant trading economy which it could beif it gave up on the plans for continental dominance.

The Elites in Brussels can't see the wood for the trees, and would rather punish the Uk for stating the obvious than clean up their act and allow the continent to really trade - the EU is past its sell by date and Europe will have to find out the hard way. The UK is excited about this new challenge.

The argument about needing years to negotiate trade deals is rather weak. First it ignores that for the time being the UK is still part of the EU, so it has excellent trade deals in place. Second it ignores the fact that the UK has an extremely long history of free trade, which makes the 'uncertainty' argument rather weak, to the contraray there is no more certain country for free trade policies. The only real threat is the EU forcing some onerous trade deal on the UK, but i fail to see why old trading partners such as NL would go along with such a trade deal. So all in all, new deals may take some time, but are almost 100% guaranteed to be free trade positive.

Presumably, when Britain eventually exits the EU, to continue to enjoy passporting banks domiciled in Britain will have to apply for a banking licence in at least one of the remaining EU member states. Similarly corporations domiciled in Britain and planning to issue securities in EU will have to also register their prospectus in at least one EU member state. It remains to be tested whether a licensed entity that is domiciled in a EU member state can outsource its core operations to an affiliate entity domiciled in London. In that way, perhaps financial services firms may continue to avail themselves to the City’s highly developed institutions and infrastructures and still enjoy market access to the EU markets.

Also, the benefits of passporting should not be exaggerated; Cross-border trade within EU is not as seamless as it is made out to be. Although firms domiciled in one EU member state have market access to other EU member states, they are nonetheless still subject to differing trading rules and public interest considerations of each of the other member states, as the EU court cases Re Keck & Mithouard and Alpine Investment had shown.

@John, the thing is that you don't need to share the same currency or economic space to do that.

The several deals the EU has with non EU countries (Swizterland, Norway, etc) can be applied to the UK, and regarding the city, well Singapore is a major financial place and they are not integrated with asia. How many non US companies are listed in NY?

When Britain leaves the EU all of the trade deals signed by the EU will no longer include the UK, and it will need to replace them with freshly negotiated deals, or accept higher tariffs. In any case, Britain's dependence on banking within the EU means it needs to have access to the internal market (using the so-called Passport) for the City to be able to trade uninterrupted with the EU. The word is that this will not be happening, and so the banks will leave London and base themselves elsewhere in the EU, probably Frankfurt or Paris, but possibly in Dublin or Luxembourg.

“Excess capacity … low”? Perhaps both sides to this argument could provide some statistics to show the size of the excess output capacity in Britain’s traded sectors.

If Britain’s traded sectors do not have the excess capacity to ramp up output, then a cheaper £ may result initially in higher import costs and exports may not increase until investments in new capacity come on stream. Furthermore investments in capacity to substitute imports with local production will depend on whether Britain, despite a cheaper £, still has the comparative advantage to produce these imported goods and services. These questions were examined in these two blogs:

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PS OnPoint

The Mueller report in America, along with reports of interference in this week’s European Parliament election, has laid bare the lengths to which Russia will go to undermine Western democracies. But whether Westerners have fully awoken to the threat is an open question.

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